Financial Sanctions and North Korea:


[This is the second article by John McGlynn in a series that meticulously dissects US charges of North Korean criminality, notably the forgery of US currency and money laundering, the significance of the legal instruments it has imposed on North Korea through Banco Delta Asia, and the significance of US actions for the resolution of the interrelated issues of North Korean nuclear weapons and the normalization of US-North Korean relations. (See part 1 here.)

 

Among the important conclusions that it reaches are the following:

 

First, surveying the official record of charges of counterfeiting and money laundering since the early 1990s, it is difficult to understand why the US government ever identified the DPRK or Macau as currency counterfeiting concerns in the first place. Difficult to understand, that is, unless the charges are politically motivated and rest on no solid evidentiary basis.

 

Second, ultimately, the US Treasury’s decision to impose the fifth special measure on Banco Delta Asia was not based on any regulatory, legislative or procedural shortcoming in Macau but on the “likelihood of recidivism” by BDA’s owners and the “potential use of the bank for illicit purposes.”

 

Third, US policy toward North Korea has been and remains deeply divided between approaches favored by the State Department and the Treasury, the former looking to negotiations to eliminate the North Korean nuclear threat within the framework of the six-party talks, the latter directed toward regime change in the DPRK.

 

See also McGlynn’s Banco Delta Asia, North Korea’s Frozen Funds and US Undermining of the Six-Party Talks: Obstacles to a Solution.]

 

 

Introduction

 

What evidence is there to support accusations that North Korea is a money-laundering and currency counterfeiting state? The answer, at least so far as the public record is concerned, is none.

 

This article examines four issues:

 

  1. The US Treasury Department’s action to blacklist Banco Delta Asia (of Macau), which set the stage for a US-led international campaign of financial sanctions against the Democratic Peoples Republic of Korea (DPRK, the official name of North Korea);

 

  1. The evidence, or lack of it, of involvement by the DPRK in money laundering and currency counterfeiting;

 

  1. The credibility of accusations by US government officials that the action against Banco Delta Asia is a law enforcement matter rather than an attempt to deny the DPRK access to the international banking system;

 

  1. The apparent lack of interest among US and international authorities in the DPRK and Macau as currency counterfeiting concerns prior to the September 2005 blacklisting of Banco Delta Asia.

 

Since late 2005 the US government, despite its claims to the contrary, has been using its formal censure of Banco Delta Asia (BDA) as the lynchpin in a campaign of financial sanctions against the DPRK. Although US officials have repeatedly insisted on describing these sanctions as a law enforcement matter, that characterization appears incorrect and may be deliberately false. The financial sanctions in place are a product of the USA Patriot Act, a controversial law enacted in the immediate aftermath of 9-11. Section 311 of the Act gives the US government wide scope to use classified intelligence to support allegations of illicit activities by overseas financial institutions and the US Treasury Department the right to cut-off a suspected wrongdoer from the US financial system through imposition of what is called the fifth special measure. Section 311 requires the Treasury Department to consult with the US State Department, among other federal agencies, on the implications of financial sanctions for US foreign policy (such as the State Department’s successful participation in the Six-Party negotiations) and national security (such as finding ways to terminate or restrict the DPRK’s nuclear weapons and ballistic missile development programs). A close reading of newspapers makes it clear that whatever Section 311 consultations may have occurred, since the financial sanctions against the DPRK reached public attention in early 2006 State and Treasury have not been on the same page when it comes to US foreign policy toward the DPRK.

 

US government officials have argued that financial sanctions are necessary to counteract alleged DPRK involvement in money laundering and currency counterfeiting. There is indeed evidence of wrongdoing, but it dates from 1994, or possibly over an unknown but short span of years leading up to 1998. But since the late 1990s it appears that no agency of the US government has publicly presented credible evidence.

 

Many who have studied the Bush administration’s foreign policy toward the DPRK conclude that it suffers from a split personality. On one side is a pro-engagement faction (led by Secretary of State Condoleezza Rice, assisted by her envoy to the Six Party Talks, Christopher Hill) willing to engage in diplomatic negotiations that might someday lead to a resolution of all outstanding major differences between the two countries including dismantling of the DPRK nuclear weapons program and US-DPRK normalization of relations. On the other is a hawkish faction (led by US Vice-President Dick Cheney, assisted at one point by former United Nations ambassador John Bolton and others) which has favored a get-tough approach, basically a continuation of the standard US policy for the last 50 years: international isolation, occasional public pronouncements about the need for regime change; and threats of war.

 

These two sides have been battling each other ever since the Bush administration came to office, but a key moment came in September 2005 over whether to pursue multilateral and bilateral engagement based on negotiated objectives which had been agreed during the September 13-19, 2005 Six-Party Talks (dismantlement of the DPRK’s nuclear weapons program, normalization of US-DPRK relations, etc.) or to step up the pressure on North Korea and isolate it even further from the international community. The hawks won that particular round, as only became apparent several months later, by managing to stymie (but not kill) the Six-Party process through the application of financial sanctions.

 

Details are sketchy, but apparently as of mid-June US and Russian banking officials, working with financial authorities in Macau, had arranged to transfer the DPRK’s funds on deposit at BDA to a bank in Russia (likely to be the Far East Commercial Bank, according to the Wall Street Journal[1]. Because the DPRK has signaled that it agrees to the transfer, it appears the process of implementing the Six Party agreement can resume.

 

If this transfer does take place and if the Russian bank can get assurances from the US Treasury Department that it will not be barred from the US financial market for handling the DPRK’s money, the way may be clear for the DPRK to escape from 18 months of international financial sanctions and for the Six Party diplomatic process aimed at denuclearizing the Korean Peninsula and achieving a permanent peace in Northeast Asia to resume. Such an outcome would be positive for the stability and security of the Northeast Asian region, but it leaves unclear how or when the blacklisting of BDA is to be resolved. One thing that is clear is that with the DPRK and its funds out of the picture, BDA becomes a matter strictly for US and Chinese authorities to settle.

 

The transfer of funds to the Russian bank is in no small degree the product of an atmosphere conducive to the resumption of Six Party talks developed over the first six months of 2007, thanks mainly to a US decision in January[2] to drop its belligerent posture toward the DPRK. It now appears that the pro-engagement faction in Washington is in charge of policy and is now focused on bringing the DPRK back into diplomatic negotiations. But the contest of wills is not over. Reaching a permanent solution to the BDA affair depends on a decision by Treasury officials to withdraw the Patriot Act Section 311 blacklisting. That will be difficult because it would mean a loss of bureaucratic face and a decision to forego use of one of the legal tools created in the wake of 9-11 to fight terrorism and other perceived threats.

 

I. US Treasury’s Finding and Rulemaking: Setting the Stage for Financial Sanctions

 

Two notices published by the US Treasury Department in the US Federal Register on September 20, 2005, a Finding and a proposed “Rulemaking” (hereafter, “proposed Rule”), established the legal basis for the US government to initiate a regulatory process that in time resulted in cutting the DPRK off from the international banking system [3]. Until around December 2005, when the DPRK started to protest the legal and political significance of these notices, the public and the media had little awareness of their existence.

 

Both notices were prepared by the Financial Crimes Enforcement Network (FinCEN), a unit in the US Treasury Department. FinCEN describes itself as “a network, a means of bringing people and information together to fight the complex problem of money laundering”, which it does by “information sharing among law enforcement agencies and its other partners in the regulatory and financial communities.”[4]

 

In regard to investigations into counterfeiting of United States currency, FinCEN relies heavily on the work of the US Secret Service, which since its creation is 1865 has had the job of suppressing dollar forgery. In 1894 the Secret Service also began providing protection to the US president and later the vice president, their families, visiting heads of state and other designated individuals.[5]

 

The summary at the beginning of the Finding states the Director of FinCEN “finds that reasonable grounds exist for concluding that” BDA “is a financial institution of primary money laundering concern.”

 

In regard to the DPRK, the principal discovery reported in the Finding was the “involvement of North Korean government agencies and front companies in a wide variety of illegal activities, including drug trafficking and counterfeiting of goods and currency,” all of which “has been widely reported.”

 

According to the Finding, BDA is the fourth smallest commercial bank operating in the Chinese territory of Macau (the Macau Monetary Authority reports 27 banks). BDA

 

“has provided financial services for over 20 years to multiple North Korean government agencies and front companies that are engaged in illicit activities, and continues to develop these relationships. In fact, such account holders comprise a significant amount of Banco Delta Asia’s business.”

 

FinCEN’s authority to conclude that a bank is a “primary money laundering concern” comes from Section 311 of the USA Patriot Act, which was passed by overwhelming votes in both houses of the US Congress and signed into law by President George H. Bush in the month following the 9-11 terrorist attacks. Section 311 grants the US Treasury Secretary the authority to make determinations that a particular foreign bank, jurisdiction, financial account or financial transaction is a “primary money laundering concern.” The key law enforcement features of Section 311 are five “special measures” that the Treasury Secretary can use “to target specific money laundering and terrorist financing.” The five special measures are:

 

(1)   Recordkeeping and reporting of certain financial transactions;

 

(2)   Collection of information relating to beneficial ownership;

 

(3)   Collection of information relating to certain payable-through accounts;

 

(4)   Collection of information relating to certain correspondent accounts; and

 

(5)   Prohibition or conditions on the opening or maintaining of correspondent or payable-through accounts.[6]

 

Moreover, “Section 311 identifies factors for the [US Treasury] Secretary to consider and Federal agencies to consult before the Secretary may conclude that” a “primary money laundering concern”[7] exists. As explained below, these words came to have high significance.

 

To deal with BDA, Treasury applied the fifth special measure, which “authorizes the prohibition against the opening or maintaining of correspondent accounts by any [US] domestic financial institution or agency for or on behalf of a targeted financial institution.” A “correspondent account” is defined as “an account established to receive deposits from, or make payments or other disbursements on behalf of, a foreign bank, or handle other financial transactions related to the foreign bank.” The proposed Rule is explained across six pages of the Federal Register but these two brief excerpts provided the hook on which to hang a campaign that would mobilize the entire international private banking community to boycott BDA as well as any other financial institution that might wish to do business with the DPRK. A global financial chain reaction was triggered, as banks everywhere were quick to realize that they had to cut any financial links to the DPRK “rather than risk becoming the target of similar action” by US authorities, as the New York Times explained.[8]

 

In November 2006 Stuart Levey, the Treasury Department’s Under Secretary for Terrorism and Financial Intelligence and point man for the financial sanctions campaign, described his understanding of how the banking restrictions imposed on BDA affected the DPRK:

 

“Because of the way North Korea operates, it’s very difficult for financial institutions to differentiate between its licit and illicit activities. And so, a lot of banks have decided that as long as North Korea is engaged in illicit activity, they don’t want to take any chances of being associated with it. As a result, the North Koreans have had a very difficult time.”[9]

 

Martin Hart-Landsberg and John Feffer elaborate on what this “very difficult time” actually entails: “The financial sanctions infringe upon [the DPRK’s] sovereign right to engage in legal transactions, raise doubts about Washington’s will to peacefully coexist, and represent steps away from normalizing relations.”[10]

 

For a country forced to execute cash-only business transactions because of underdeveloped credit facilities, financial sanctions are potentially devastating. The US-led campaign to apply financial sanctions has therefore been more irksome to the DPRK than the sanctions mandated by the United Nations Security Council in October 2006, after the DPRK conducted its first nuclear test. As Marcus Noland, a senior fellow at the Institute for International Economics and an expert on the economy of the DPRK, put it:

 

“North Korea is showing a more hostile reaction to the freezing of its accounts at Banco Delta Asia (BDA) in Macao than to the official sanctions by the UN. The UN sanctions are moderate and have loopholes in them, whereas the BDA measure brings about cascading effects on the external economic trade of North Korea. Moreover, financial institutions of many countries that are reluctant to be implicated in the illegal conducts of North Korea have begun to stop trade with North Korea. As a result, North Korea is facing an increasing amount of difficulties in international finance trade. This is also shown by the depreciation of the North Korean won in the black market.”[11]

 

In the months that followed the release of Treasury’s September 2005 Finding on BDA, banks around the world began to realize that undertaking any financial dealings with BDA might put their own business interests in the US financial market at risk. They also realized that since BDA’s business on behalf of the DPRK was the source of its troubles, handling DPRK funds had to be avoided at all costs. In this way the US managed to strong arm the global private banking system into an informal blacklisting of both BDA and the DPRK. The formal cut off of BDA from the US financial market occurred in March 2007, when Treasury issued its Final Rule on BDA, which simultaneously served as an announcement that the fifth special measure had been imposed.[12]

 

II. Money Laundering and Counterfeiting Evidence: Thin Gruel

 

After the Bush administration arrived in office Washington stepped up its campaign to depict the DPRK as a criminal or “Soprano” state. Besides illicit financial activities there have also been accusations of drug trafficking and counterfeiting of such products as cigarettes. The main financial crime accusations are money laundering of profits generated by criminal ventures (such as drug trafficking) and the counterfeiting of $100 “supernotes.” But what is the evidence? Is it public? And how recent is it?

 

Two US government documents are relevant. The first and most important is the September 2005 Finding, in which Washington lays out its official justification for actions that ultimately triggered the financial sanctions against the DPRK. The second is a March 22, 2006 report issued by the Congressional Research Service (CRS) of the Library of Congress.

 

A. The Finding: September 2005

 

The word “evidence” appears only once in FinCEN’s Finding:

 

“Substantial evidence exists that North Korean governmental entities and officials launder the proceeds of narcotics trafficking, counterfeit activities, and other illegal activities through a network of front companies that use financial institutions in Macau for their operations.”

 

But instead of “evidence,” the Finding introduces “Section 311 factors”, which present “reasonable grounds” for “concluding that Banco Delta Asia is a financial institution of primary money laundering concern” which has assisted the DPRK to commit financial crimes.

 

Those “Section 311 factors,” describing suspect financial transactions between BDA and DPRK entities, are listed as follows:

 

  1. Banco Delta Asia has provided financial services for over 20 years to multiple North Korean government agencies and front companies that are engaged in illicit activities, and continues to develop these relationships. In fact, such account holders comprise a significant amount of Banco Delta Asia’s business.

 

  1. Banco Delta Asia has tailored its services to the DPRK’s demands. For example, sources show that the DPRK pays a fee to Banco Delta Asia for financial access to the banking system with little oversight or control.

 

  1. The bank also handles the bulk of the DPRK’s precious metal sales, and helps North Korean agents conduct surreptitious, multi-million dollar cash deposits and withdrawals.

 

  1. Banco Delta Asia’s questionable relationship with the DPRK is further demonstrated by its maintenance of an uninterrupted banking relationship with one North Korean front company despite the fact that the head of the company was charged with attempting to deposit large sums of counterfeit currency into Banco Delta Asia and was expelled from Macau. Although this same person later returned to his previous leadership position at the front company, services provided by Banco Delta Asia were not discontinued.

 

  1. Banco Delta Asia’s special relationship with the DPRK has specifically facilitated the criminal activities of North Korean government agencies and front companies. For example, sources show that senior officials in Banco Delta Asia are working with DPRK officials to accept large deposits of cash, including counterfeit U.S. currency, and agreeing to place that currency into circulation.

 

  1. It has been widely reported that one well-known North Korean front company that has been a client of Banco Delta Asia for over a decade has conducted numerous illegal activities, including distributing counterfeit currency and smuggling counterfeit tobacco products. In addition, the front company has also long been suspected of being involved in international drug trafficking.

 

  1. Banco Delta Asia facilitated several multi-million dollar wire transfers connected with alleged criminal activity on behalf of another North Korean front company.

 

  1. In addition to facilitating illicit activities of the DPRK, investigations have revealed that Banco Delta Asia serviced a multi-million dollar account on behalf of a known international drug trafficker.

 

[Note: Numbers above added by the author.]

 

None of these charges have been accompanied by conclusive or convincing evidence of wrongdoing. It is a list of allegations, which are by their nature almost impossible to verify since the basic factual information needed to confirm criminality, such as dates, sums of money involved and names of individuals or DPRK entities involved, is absent.

 

“Sources” are twice cited, but FinCEN’s three formal documents on BDA — the proposed Rule, Finding and Final Rule — give no clue as to their identity. According to a spokesperson for the US Treasury Department, some are “intelligence channels.”[13] Apparently none has ever gone on the record. In contrast to unnamed “sources” the only mention in the list of an apparent attempt by a US government agency to conduct its own direct investigation into possible illicit activities is found in factor #8, which states: “Investigations have revealed that Banco Delta Asia serviced a multi-million dollar account on behalf of a known international drug trafficker.” When asked about this drug trafficker the Treasury spokesperson replied: “We declassify our statements down to every last word, and we were not able to include the name of the drug trafficker in the downgrade. I will let you know if we’re permitted to disclose the nationality of the individual or even whether or not he is North Korean.”[14] No additional information was received. Also, a May 2007 petition submitted to Treasury by Jones Day, counsel for Stanley Au, BDA’s principal owner, and for the Delta Asia Group, BDA’s majority owner, states that this drug trafficker “is not ‘known’ to Mr. Au or the Delta Asia Group.”[15]

 

Leaving aside factor #4 (a 1994 incident that is discussed below) and the unnamed “sources” relied on for factors 2 and 5, everything else is “alleged,” “widely reported” or “long been suspected.” As such, in the words of the Jones Day petition, “it is impossible [for BDA’s owners or its counsel] to formulate specific responses”, because the “allegations of wrongdoing” are “often so vague and devoid of specificity.”[16]

 

Factor #4 in the list at first seems to be incriminating, as it is the only attempt in the list of “factors” to cite a specific link between a DPRK representative and criminal activity, namely, an attempt to deposit counterfeit US currency. But here too the Finding is notably vague.

 

Based on clues found in the March 22, 2006 CRS report, this incident appears to have taken place in 1994: “In 1994 . . . North Korean trading company executives, who carried diplomatic passports, were arrested for depositing $250,000 in counterfeit notes in a Macao bank.”[17]Contacted by email, a Treasury Department spokesperson confirmed that factor #4 was indeed this 1994 incident, but was unable to comment further because the US investigation into the incident was handled by the Secret Service. A Secret Service public affairs special agent would only say that this 11-year-old incident involved an “ongoing and active investigation and we are therefore unable to make any comment.”[18]

 

Considerably more information about this 1994 incident can be found in the statement Stanley Au, BDA’s principal shareholder, submitted to Treasury on May 2, 2007. As the 1994 incident is the only specific accusation of currency counterfeiting in Treasury’s portfolio of “Section 311 factors” that establish “reasonable grounds” for concluding BDA is an illicit financial operation, it is worth replicating Au’s account of the incident in detail:

 

“To the best of my knowledge, there was only one incident in which a significant quantity of counterfeit U.S. dollars was deposited with the Bank by a North Korean client, and that incident was reported by Banco Delta Asia to the authorities. In mid-June 1994 the Bank received approximately US$341,000 in cash which was paid into the accounts of three customers. Approximately $230,000 was paid into the account of San Hap General Trading Company (‘San Hap’). Approximately $20,000 was paid into the account of Kwok Tou. San Hap and Kwok Tou were not North Korean persons or entities but both were known to have business connections with North Korea. Also in mid-June, $91,000 was paid into the account of Korea United Development Bank (a North Korean bank) by Zokwang Trading Co Ltd (‘Zokwang’). Of the overall total amount of US$341,000, the Bank retained approximately US$10,000. It sold approximately US$79,000 of the notes to DAC [Delta Asia Credit Limited] in Hong Kong and I believe the remainder of approximately $250,000 were sold to the Hong Kong branch of Republic National Bank of New York (‘Republic’), which later became part of HSBC. Republic informed the Bank on or about 20th June that approximately $160,000 of the notes it had received were counterfeit. DAC and the Bank checked the authenticity of the notes that they were each holding and found them also to be counterfeit. The Hong Kong and Macau police authorities were then notified accordingly. The credit entries in the accounts of San Hap and Kwok Tou were reversed as a result. Since neither raised any objection to this, the Bank took this to mean that they were aware that the cash they had deposited was counterfeit. Accordingly, the Bank closed their bank accounts and terminated its relationship with them. Zokwang told the Bank that the cash paid into its account had come into its possession in China and that it had no knowledge that it was counterfeit. The Bank had no evidence to challenge this and allowed Zokwang to maintain its account but told it that if any counterfeit currency was ever paid into its bank account again, no matter what the circumstances, it would cease all business dealings . . . To the best of my knowledge, Zokwang has never since 1994 been found to be the source of counterfeit funds deposited with Banco Delta Asia.